Friends (and Employees) with Benefits New Rules Make Retirement Plans More Accessible to Small Businesses
When it comes to retirement plans, you might be thinking, “I’d love to offer a retirement plan to my employees, but we just can’t afford it.” Or maybe 401Ks are too confusing and you feel like you don’t have the time to administer one.
You’re not alone. Data from SCORE, mentors to America’s small businesses, shows that the smaller the business the less likely it is to offer a retirement plan to its employees. To be specific, only 28% of businesses with fewer than 10 employees offer retirement plans for employees.
But the real question is can small business owners really afford not to offer retirement plans? According to another recent employment survey, 35% of employees said retirement benefits were a key reason for taking a job, and 47% said retirement benefits were an important reason for staying on the job.
A new Department of Labor rule that went into effect September 30, 2019 aims to make small business owners think twice about retirement plans. The rule, finalized in July, makes it simpler for small businesses to join with others to offer multiple-employer plans, also known as Open MEPs, gaining the necessary scale to bring down costs for both employers and employees, potentially leading to greater growth in their retirement assets over time.
A MEP is a streamlined version of complex 401(k) — it’s just a plan with two or more employers that have joined together to offer retirement plans to their employees. Pooling the assets of multiple businesses into a single plan provides the critical mass needed to negotiate more favorable investment and service fees, like those available to larger plans.
MEPs have been around for quite a while, in fact, unions were the early adopters of this plan type. In the past, businesses could only access “Closed” MEPs if they were run through an association whose principal purpose was something other than sponsoring the MEP, and whose members were in the same industry, or the same geographic location. The new rule creates an “Open” MEP that is just that — open to anyone as long as they are connected as members of a regional group like a Chamber of Commerce. It also allows access to the plan via a third-party human-resources administrator that handles employment responsibilities on their behalf.
The scale of MEPs also makes it easier for small businesses to offer retirement planning with some of the upgrades that have proven to boost personal savings. Examples of such features include auto-enrollment and auto-escalation, which automatically increases the percentage of savings each year up to a certain limit.
The Setting Every Community Up for Retirement Enhancement (SECURE) Act also increases the employer tax credit for setting up a 401(k) plan, currently capped at $500, to as much as $5,000 in each of the plan’s first three years.
Also, under SECURE, part-time employees that work at least 500 hours per year for three years straight are eligible for 401(k) plans. Previous rules required a minimum of 1,000 hours per year to receive a retirement package.
The benefits of sponsoring a retirement plan as a small business owner are numerous—that much is clear. And just think about how good you’ll feel knowing you are making a lasting impact on the financial future of your employees.